A system and methods are provided for releasing the proceeds of an ACH (Automated Clearing House) transaction, or other electronic fund transfer, before it has settled or cleared, based on the availability of a credit source associated with the payee.
Among the existing methods of making purchases, particularly consumer purchases, and transferring funds from one person to another, ACH transactions have been used sparingly. One reason for their lack of popularity is that the recipient of funds from the purchase or transfer (e.g., a business) usually desires receipt of the funds relatively quickly. For example, a merchant is understandably reluctant to deliver his goods or services until payment is assured. ACH transactions are not typically settled, however, until at least one business day later, and may be rejected or returned before, or even after, settlement.
Thus, when timely consummation of a transaction is desired, the relatively lengthy period of time that elapses between the initiation of an ACH transaction and the final availability of the funds involved in the transaction tend to make them an unattractive option. Credit cards, debit cards, ATM (Automated Teller Machine) cards and other sources of instantly available funds are much more compatible with the need for instant gratification and thus tend to be more popular in typical consumer purchases or fund transfers.
The delay encountered with ACH transactions is inherent in the way they are handled. An ACH transaction, or entry, is initiated by an originator (e.g., a company or organization) that is directing the transfer of funds on behalf of, and with the authorization of, a receiver (e.g., a customer). Thus, originator and receiver refer to the entities that initiate and receive an ACH entry, which may be either a credit or a debit to the receiver's account. An originator sends the transfer instructions to an originating depository financial institution (ODFI). The ODFI forwards ACH entries to an ACH operator (e.g., a Federal Reserve Bank) for settlement. ACH entries are then sent to the respective receiving depository financial institutions (RDFI) where they are posted to the appropriate depositors' (receivers) accounts. Although ACH transactions are generally conducted electronically, they are batch-processed instead of being handled one at a time.
An ACH credit entry occurs when an originator initiates a transfer to move funds into a receiver's account. For example, a person may be the recipient of ACH credit funds in the form of direct deposit (e.g., of his or her salary). In this case, the employer is the originator and the employee is the receiver. Or, a consumer may act as an originator by authorizing monthly payments (e.g., for a utility, Internet access, loan payment) to a creditor, which then acts as the receiver.
Funds flow in the opposite direction for an ACH debit entry. In particular, funds are collected from a receiver's account and transferred to an originator's account. Thus, when a consumer preauthorizes a debit, the originator is the company or other entity authorized to collect the debt and the consumer is the receiver.
During the settlement or clearing process, a depository financial institution or ACH operator may “reject” an ACH entry because it is formatted incorrectly or is otherwise unacceptable. Accepted ACH entries are then settled on the assumption that the funds are available and will be transferred as specified. Settlement of an ACH entry generally occurs on the business day following its initiation. However, even after settlement, an RDFI may “return” an ACH debit entry due to insufficient funds in the receiver's account. Thus, settlement of an ACH debit does not guarantee that the receiver has sufficient funds to cover the entry. If the originator, or the ODFI processing an ACH entry for the originator, releases the funds of the entry too soon, and the RDFI later determines that the receiver has insufficient funds and therefore “returns” the entry, the originator or ODFI may be at risk of losing those funds.
Although ACH transactions may be riskier or slower for a merchant than credit cards and instruments such as debit cards and ATM cards, they are less expensive. In particular, for each credit card transaction accepted by a merchant, the merchant may have to pay a fixed fee plus a percentage of the value of the transaction. For an ATM card, a merchant may have to pay a fixed fee similar in magnitude to that assessed in a credit card transaction. However, the cost to a merchant of an ACH transaction may be on the order of just a few cents. If ACH transactions were employed for more consumer transactions, merchants' costs would be decreased, and these savings could be passed on to consumers.
Therefore, what is needed is a method of making the proceeds of an ACH entry available without the delay that is normally incurred in ensuring that they are available.